Board ponders tax changes as $1M per month pours in

Marijuana Control Board members Brandon Emmett, left, and Nick Miller are seen at a meeting June 13 in Anchorage. The board is currently considering whether to recommend changes to the state tax structure for the industry such as shifting from a tax at the cultivation level to one at retail. (Photo/Naomi Klouda/AJOC)

A million dollars per month in marijuana taxes paid mostly in cash to the Alaska Department of Revenue is creating a few headaches.

About 76 percent of all taxes are paid in cash, Tax Division Director Ken Alper said, and the rest comes in money orders.

The Department of Revenue made a presentation June 13 before the Marijuana Control Board at its meeting in Anchorage to address the issue of taxes. The board is pondering a recommendation to the Legislature to change the tax structure on the industry to a retail tax from the current flat excise tax on cultivators, but wanted input from Revenue before making its proposal.

That led to an in-depth discussion about what’s currently going on in the cash-only industry.

Chairman Mark Springer asked if collecting taxes in cash “stinks as much as you thought it was going to?”

“Yes,” said Revenue Audit Supervisor Kelly Mazzei, who made the presentation to the board with Alper and Deputy Director Brandon Spanos.

Large volumes of cash necessitated the recent purchase of a new money counting machine at the Department of Revenue. The new machine, similar to what banks use, cost $20,000.

“We’ve had one since we started accepting cash,” Spanos said. “But it had only two trays. One tray for cash and two for the money to come out. We needed to separate it by denomination and it takes more time. We’ve lost bodies in the Tax Division due to budget cuts so we’re doing more with less people. In order to continue to process the same amount of cash, we’ve purchased a larger machine with nine output trays.”

Over the past four years, the Revenue Department lost 22 positions to budget cuts and is down to 107 positions to handle the different taxes the state collects.

Meanwhile, the number of taxpayers continues to grow as new marijuana cultivation licenses are granted.

That wasn’t a bad problem to have when the state began collecting incrementally more in taxes per month, Revenue officials said.

“It’s been a big headache over the past few years,” Spanos said. “We’re pleased that we are able to accept the payments and process them, but it would make things easier if Congress did something to help banks feel more comfortable taking the cash. And it would be safer for everyone, not only for our employees.”

Revenue hires an armored truck to take the money to the bank, Spanos said. The cash counting activity goes on almost daily, he said.

The many questions from business owners also resulted in spending a considerable amount of time on the phones, Spanos said.

“We talk with every new licensee on the phone. We’re getting welcome packets to everyone and issue instructions on how to pay in cash. We’ve done more FAQs. Then the almost daily processing of cash and the cost of transporting the cash,” Spanos said. “And it’s not slowing down.”

Other states such as Colorado, California and Oregon have also been struggling with the cash-only nature of the business. Board member Brandon Emmett found, while attending an industry conference in Washington, D.C., that Washington state has adapted by having the taxpayers make a deposit at a specific bank.

“They have worked out that 97 percent of their tax payments are made through Salal (Credit Union of Seattle) to alleviate safety concerns,” he said. “Have you explored doing something like that?”

Alper responded that yes, they’ve explored establishing a bank account that the industry taxpayers can use to make direct payments to the Revenue Department.

“The problem is that no bank or credit union is willing to work with the industry. If one were to step forward, we would work with them,” Alper said.

The fear is that, given marijuana’s continued listing as a Schedule I drug in the federal Controlled Substances Act, banks could be charged with breaking the law by accepting money from the industry.

But these smaller credit unions, such as Salal, have worked out ways to remain in compliance with state laws and early on received the guidance of the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN.

In February of 2014, just as Colorado and Washington were setting up their recreational marijuana markets, FinCEN released guidance saying that they would not charge a bank with federal crimes for accepting weed money if the financial institution made sure that the business was following all state laws and the directives of a previous memo from the Department of Justice, according to an industry publication called The Stranger.

As for progress made proposing a shift in how the Alaska industry is taxed, the board is still in the fact-gathering mode, Springer said. At the June 13 board meeting, discussion was also tangled up in what voters intended in supporting the initiative that made marijuana legal.

Board member Loren Jones noted that the $50 per ounce tax at the cultivator level was put to the public as part of the initiative when they voted to make marijuana legal in the state.

But board member Emmett countered that there’s shame in admitting they “got it wrong.”

“It was palatable to voters at the time, but it’s not working. If we had a black market on the ropes, almost stamped out, then it wouldn’t be an issue,” Emmett said.

As it is, the legal industry has a hard time competing on prices to customers when they must calculate in $800 in taxes per pound of marijuana. Growers in California and elsewhere are making illegal shipments to Alaska that continue to fill the black market niche. To be more competitive, prices at the counter for marijuana sales need to be lower, matching with the high supply available from Alaska’s 90 cultivators, he said.

Considering the industry brings in about $10 million monthly in revenue and pays $1 million a month in taxes, the tax is working out to be 10 percent, Alper pointed out.

“That’s not a gigantic tax when you look at the whole picture,” he said.

Only the Alaska Legislature can change tax laws. Alper said the Department of Revenue will be running various scenarios for a report for the board in the coming months to help it decide on what to recommend to the Legislature.